Standing Up for Cap and Trade

Cap and trade[2] has gotten a bad rap. It’s been vilified as a national energy tax, an elaborate Ponzi scheme, and a giveaway to corporate polluters.

While these attacks are wrong, they succeeded in shaping the political discourse around national climate and energy policy, which undoubtedly contributed to last week’s decision by Senate leaders to delay consideration of legislation that would limit greenhouse gas emissions.

This is unfortunate. We need a national policy to reduce emissions, and, as our new white paper[3] shows, cap and trade is still the best, most cost-effective way of doing so. When lawmakers turn their attention back to this issue — as they must — they should make cap and trade a foundational element of the policy response to climate change.

“When it comes to climate change and environmental issues more generally, environmental economists recognize that the source of many problems is not markets per se, but the absence of markets for environmental goods and services,” Harvard University’s Robert N. Stavins and I write in the new brief “Meaningful and Cost Effective Climate Policy: The Case for Cap and Trade.”[3]

We know that cap-and-trade works not just based on theory but decades of real-world experience with the policy. Notably we have used market-based policy to unleash the power of free enterprise to reduce acid rain, protect the ozone layer, and even eliminate lead in gasoline. Studies have consistently shown that using the power of the market to address these problems not only dealt with them effectively, it did so at a cost that was significantly lower than what would have occurred had more conventional command-and-control regulations been used.

While the economic downturn and high jobless rate have naturally focused attention on the estimated costs of cap-and-trade, critics have tended to inflate and exaggerate these costs. They also typically fail to put these costs in perspective: NOT taking action to address climate change has an even greater cost, and the longer we delay the more difficult and costly it will be to address.

Critics also leave out the fact that not taking action puts us behind other countries like China that are forging ahead on low carbon technology. Using cap-and-trade creates a value or price on greenhouse gas pollution that both rewards innovative firms for reducing their emissions and provides policy certainty that investment in low carbon technology will be worthwhile. Until this certainty exists here in the U.S., firms will invest elsewhere. Ironically, one place companies may turn to is China, which just announced a national cap-and-trade plan, just as we announced we would delay the development of our own.